As a result of the credit crisis of 2008, the Bush and Obama administrations implemented a program called the Troubled Asset Relief Program (TARP). Much controversy surrounded this decision, which was made in an effort to save the U.S. economy from financial collapse as a result of the mortgage meltdown of 2008.
The mortgage meltdown of 2008 caused a financial crisis for the banks. A “troubled asset” is a subprime mortgage that, when its true value is placed on a bank’s balance sheets, makes the bank insolvent. The value of the mortgage is less than the value of the original loan. Thus, the cumulative deficit of these mortgages meant the bank carried too much debt to stay afloat. Because these assets put banks in such dire straits, these financial institutions sought cash infusions in the form of loans from the Federal Reserve.
Because financial institutions combined these toxic mortgages into “mortgage-backed securities” that were deemed low-risk by rating agencies like Moody’s and Standard & Poor's, many governments and institutions bought them. When the housing meltdown occurred, these securities were practically worthless.
The Federal Reserve cites the TARP bailouts as a way to stimulate lending and issue capital in an otherwise-frozen credit market. The Fed infused this liquidity by purchasing shares and assets of several banking institutions. Thus, the government became a large shareholder of these institutions.
Recipients of TARP Bailouts
ProPublica.org lists which financial institutions were the recipients of the estimated $700 billion TARP bailout program. AIG received one of the largest bailouts, totaling roughly $70 billion. Citigroup received $45 billion, and Goldman Sachs and Morgan Stanley accepted $10 billion apiece. The government-sponsored enterprise of Fannie Mae was another large recipient, at $83.6 billion.
Auto industries also received large government bailouts: Chrysler got $12.8 billion and General Motors received $50.7 billion, in the form of loans and direct government investment in the company.
Issuance of TARP bailouts were lauded by some and deplored by others. TIME Magazine named Federal Chairman Ben Bernanke as their “Person of the Year” in 2009, citing his issuance of bailout money as the reason the economy did not entirely collapse. However, others, like author Jerry Robinson of the book, “Bankruptcy of Our Nation” cite the bailout as one of the biggest financial crimes in U.S. history, claiming the issuance of bailouts was little more than a “financial coup d’etat.”
The Los Angeles Times reported that Congress voted in June 2010 to end the TARP program early in an effort to pay for the financial reform bill. This three-month early cutoff of funds is estimated to save $11 billion.
ProPublica states that 77 companies have thus repaid a total of $159.3 billion in TARP funds. Among the companies that have repaid the total amount of their bailouts are Bank of America, JP Morgan Chase, Morgan Stanley, Wells Fargo and Goldman Sachs. Companies that still owe the U.S. government include General Motors and Chrysler.